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If the Market Crashes, You'll Be Glad You Own Virtu Financial

By Dave Kovaleski - Feb 23, 2021 at 6:12AM

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This market maker had a record year in 2020 and thrives on market volatility.

It was about a year ago at this time that we started to see the market's upward climb start to reverse. Within a month it would become a full-on crash. It was brought on, of course, by the deadly COVID-19 pandemic.

The market regained its value, and then some, led by the technology sector. But the market remains volatile, with many high-flying stocks overvalued and the pandemic still causing havoc. The coronavirus crash of 2020 should be a stark reminder for investors to prepare a diversified portfolio that includes stocks that can buoy your bottom line in the event of another market crash. One stock to consider owning if the market tanks again is Virtu Financial (VIRT -0.42%).

Virtu thrives on volatility

Virtu Financial is a high-frequency trading company that provides liquidity for financial markets. It is what's called a market maker, which means it quotes prices for equities, fixed income, currencies, commodities, and other securities on exchanges and profits from the spread between the buy and sell price for each trade. This provides liquidity for markets and exchanges around the world.

A woman smiling, with her arms folded, looking satisfied.

Image source: Getty Images.

So, when markets are volatile, there is more need for liquidity, which means there is more need for Virtu's market maker services. In other words, the greater the volatility, the more revenue Virtu typically makes. So, if there is a market crash, Virtu should generate higher revenue and increased profits.

Look back no further than last year for how the company fared during a crash. Virtuʻs stock price was up 64% in 2020, driven by surging revenue and increased profit. In the fourth quarter, revenue increased 69% from the same period the year before to $677 million, due to heightened levels of volatility and trading volumes due to the pandemic.

Virtu generated $198 million in net income for the quarter, up from a $29 million net loss. The low numbers in the fourth quarter of 2019 were largely due to the costs related to the acquisition of ITG to bolster Virtu's other revenue stream, execution services, which provide investment professionals with analytics and trading solutions. But the bulk of the company's revenue comes from market making. It doubled year over year to $529 million. Execution services revenue was up 12% year over year to $149 million.

For the full year 2020, revenue was up 113% to $3.2 billion, while net income was $1.1 billion, up from a net loss of $103.7 million for 2019, due in part to the ITG acquisition. Full-year 2020 revenue and net income were records for Virtu.

Virtu's outlook is good

This year, Virtu's stock price is up about 9% at of Monday's prices, and that should come as no surprise as markets remain volatile. The VIX volatility index remains elevated in the 20s, which is higher than historical averages. On the fourth-quarter earnings call, CEO Douglas Cifu said Virtu's performance to date in the first quarter "remains robust and comparable to the record daily average we achieved in 2020."

That average daily volume of equity trades in January was $14.7 billion, which is higher than the $10.9 billion average in 2020. A lot of it is driven by an influx of retail investors on sites like Robinhood. This is all good news for Virtu.

For all its potential, Virtu is available at a great valuation right now. It is trading at just 5.4 times earnings and 9.4 times forward earnings. It has a low price-to-sales ratio of just over 1 and a price-to-book just under 3. This makes it a good buy in any market, particularly now with volatility remaining high. But if the market does crash again, Virtu is definitely a stock you want in your portfolio.

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